The Rise of Passive Investing

By ETF Securities

October 24 2018
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ETFS Article

Since the first Exchange Traded Fund (ETF) launched in 1993, the industry has undergone tremendous growth. There is now more than US $5.1 trillion in over 7,000 ETFs worldwide (ETFGI, July 2018).

Originally, ETFs combined the cost-efficient, benchmark tracking strategy of equity index funds with the listed, intra-day tradability of shares. As the market has matured, ETFs have expanded to cover exposure to an increasing number of asset classes. Now, along with providing equity benchmark tracking, ETFs also offer investors the ability to diversify their portfolio by providing exposure to assets previously difficult to access.

Active fund management

The active fund manager makes investments in selected assets (whether stocks, bonds, commodities, etc.) with the goal of beating the market (usually a benchmark like the S&P/ASX 100).

Passive fund management

A passively managed fund or investment does not seek to beat the market. Instead, the passive investor tries to replicate the benchmark performance as accurately as possible. Passively managed funds tend to have lower fees than actively managed funds. The majority of ETFs are passive investments, since their aim is to track a benchmark or asset.

Active and passive investment

It might be questioned why someone would choose passive over active investment. Settling for achieving, rather than exceeding, the market return may be seen as defeatist. After all, the idea of consistent, market beating returns that transform a small initial investment into great wealth is always alluring.

However, although the aim of the active manager is to beat their benchmark, historically it has been shown that this is not always achieved over a period of time. For many investors who are looking for consistent performance, particularly for investments that they are looking to buy and hold over time, passive investment products might be a more suitable option.

The popularity of ETFs seems set to continue. Despite trebling the amount invested in ETFs over the last decade (ASX, 2018), the Australian industry is still underdeveloped in comparison to the American marketplace, where ETFs account for 10% of all assets held in funds (ICI Global, 2018), compared to only 1% in Australia (ABS, 2018).

Source: EY, Reshaping around the investor - Global ETF Research (2017)

As awareness of, and familiarity with ETFs improves, retail use of the product is continuing to grow. Compared to the United States and Europe, ETF usage in Australia is predominantly being driven by retail investors with 90% of Australian ETF assets being held by retail investors and their advisors. Retail demand in Australia is largely driven by the self-managed super funds. Today’s ETF market is rapidly increasing in both FUM and the number of products available. It is essential therefore that investors have the knowledge and resources to make informed investment decisions.

ETF Securities are dedicated to providing reliable education to investors. We will be running a series of educational webinars and events in the future. To keep informed on these please sign up to our newsletter.

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